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Written questions
Question 21.
NOA (2022) = 16,500 – 9,700 = $ 6,800
NFA (2022) = 2,000 – 1,300 = $ 700
CI(FY2022) = 2400 + 50 = $ 2,450
d (FY2022) = CI(FY2022)–(Change in CSE during FY2022) =2,450 – (7,500-6,000) = $ 1,450
FCF = OI (after tax) – Change in NOA = 2,400 – (6,800 – 6,000) = $ 1,600
I = C – FCF = 1,000 – 1,600 = - $ 600
F = FCF – d = 1,600 – 1,450= $ 150
PM = 2,400/48,000 = 5%
A. 6800
B. 700 or -700
C. 2450
D. 1450 or -1450
E. 1600
F. 600 or -600
G. 150 or -150
H. 5
Question 22.
C = 140 + 7 = $ 147
I = -$ 100 or $ 100
A. 147
B. -100 or 100
Question 23.
It is true that earnings can be manipulated easily as compared to cash flows. However, cash
flows can also be misleading. Managers can increase the cash flow from operations in the short-
term by delaying the payments to suppliers or changing the inventory management policy.
There are some non-cash transactions which should not ignored. When a company awards
stocks or stock options to its employees, the company is exchanging something of value but
this transaction will not have any effect on cash flows (ignoring cash tax effects). Ignoring such
transaction will overstate the cash flow from operations.
ACCT7106 Final Exam (Suggested Solutions) - Semester 1, 2023
3
Question 24.
Cost of Equity = 3.2% + 0.8 x 6% = 8 %
Dividend Discount Model
DDM FY22 FY23 FY24
DPS 108.00 116.64
PV(DPS) 100.00 100.00
CV 3,032.64
PV(CV) 2,600.00
Total PV 2,800.00
Value per share $ 28.00
Residual Income Model
RIM FY22 FY23 FY24
EPS 324.00 349.92
DPS 108.00 116.64
CSE/share 3,240.00 3,456.00 3,689.28
RI 64.80 73.44
PV(RI) 60.00 62.96
CV 1,909.44
PV(CV) 1,637.04
Total PV 1,760.00
Value per share $ 50.00
A. 30.3
B. 26
C. 28
D. 19.1
E. 16.4
F. 50
Question 25.
A. We obtain different valuations as the growth rate of CSE is not equal to the terminal growth
rate in terminal year.
B. Buy recommendation as stock price < value (RIM). In a short forecast horizon, RIM is more
reliable than DDM.
ACCT7106 Final Exam (Suggested Solutions) - Semester 1, 2023
4
Question 26.
• Clean surplus relation does not hold
o 18 ≠ 19.2 – 2 in FY2023
o 5 ≠ 23 – 8 in FY2024
o 25 ≠ 23.8 – 9.8 in FY2025
• Free cash flows formula from Method 1 does not hold in FY2023 (1.2 ≠ 20 – 18)
• Free cash flows formula from Method 2 does not hold in FY2023 (1.2 ≠ 0.8 – 0 + 2)
• Basic accounting equation is not balanced in FY2024 (120 ≠ 25 + 85)
• CI is not equal to OI less NFE in FY2025 (23.8 ≠ 26 – 1.2)
Question 27.
FY22 FY23 FY24
FCF 1.10 1.21
PV 1.00 1.00
TV 25.41
PV(TV) 21.00
Total PV 23.00
NFO 4.00
Value of equity 19.00
Shares outstanding 19.00
Value per share $ 1.00
Implied WACC = 10 %
Thus, implied cost of equity = 10% + 4/19 * (10% - 2%) = 11.7 %
Question 28.
If the required rate of return on equity (14%) is more than the implied cost of equity (11.7%),
it means the stock is expected to generate lower returns than what is required. Thus, you should
not invest in Gold Coast Ltd.
ACCT7106 Final Exam (Suggested Solutions) - Semester 1, 2023
5
Question 29.
2019 2020 2021 2022
$m $m $m $m
Diagnostics
Gross receivables turnover ratio 4.76 4.80 4.83 4.85
Days sales outstanding (DSO) 76.65 76.04 75.61 75.28
Allowance for doubtful debt/Gross trade receivable 9.52% 9.60% 9.66% 4.85%
Inventory turnover ratio 9.09 9.23 9.33 6.40
Days sales in inventory (DSI) 40.15 39.54 39.11 57.03
Excess cash margin: (CFO - OI)/Revenue 1.00% 0.83% 0.71% (4.38%)
CFO/OI 1.10 1.08 1.07 0.71
Deferred revenue/Sales 22.00% 20.33% 20.57% 8.50%
• Gross receivables turnover ratio (or DSO) appears to be stable.
• Allowance for doubtful debts appears to be understated in FY2022.
• Inventory turnover ratio has decreased. Inventories might be overstated in FY2022
(Inventory write-down expenses may be understated).
• Deferred revenue as a percentage of sales has significantly reduced. The company may
have aggressively recognised the revenue in FY2022.
• Excess cash margin has suddenly turned negative in FY2022 (or ratio of CFO/OI has
reduced significantly). Thus, earnings may be overstated through the manipulation of
accruals.
